MERGE: Successful Mergers In the Jan/San Industry

In a perfect world, business partnerships, mergers and acquisitions would be mutually beneficial for all parties involved. Company cultures would be identical, product lines would be complementary, and the strengths of each company would effectively wipe out the other’s weaknesses.

But with so many business aspects to align, it’s no surprise that in many cases, mergers don’t work. There are numerous reasons, including clashing corporate cultures and “surprises” in the way of finances, personnel, etc. Most often, these disasters can be traced to insufficient planning and unrealistic — and unrealized — expectations.

Studies show that 50 to 80 percent of business mergers ultimately fail. Since these failures are seldom publicized, they’re difficult to track. Regardless, what, indeed, makes for a successful merger? And what can we learn from the ones that failed?

Activity Picks Up
There has been no shortage of jan/san industry merger and acquisition activity recently (see sidebar). As the economy picks up, so has the rate of buying and selling among jan/san distributors.

“The merger and acquisition (M&A) business has really come back to life after a couple of years where things were pretty depressed,” says James Mulick, Ph.D., of Ameridan Resources, the Pittsburgh-based company that represented Peerless Paper during its 2001 acquisition by Lagasse Inc. “There’s lots of activity, valuations are going up, and you’re seeing a lot more aggressive buyers.”

Businesses, in general, are looking for ways to reach more markets or expand their product offerings, but they appreciate their own “organic” limitations.

“That is why there will always be this kind of transaction,” says Fred Kimball, principal of Distribution Design Inc., Saco, Maine. “By combining, [companies] can eliminate the duplication of effort, and create greater profits than the two companies would have had on their own. Those are huge carrots.”

Those who track general M&A activity have reported similar findings. The number of U.S. merger-and-acquisition announcements rose 14.8 percent in 2004 to 9,964; 2004 acquisition spending increased by 43.7 percent to $777 billion, according to a December 2004 report by FactSet Mergastat LLC, a company that tracks mergers and acquisitions. These numbers represent the highest M&A performance since the record-breaking market of 2000. Private-company M&A activity, specifically, increased 24.4 percent to 5,109 in 2004.

What It Takes to Make It
While most distributors agree that acquisitions can be a catalyst for business growth and increased profitability, far fewer can identify companies that are a good strategic match. There are jan/san distributors who have beaten the odds and mastered the art of acquiring.

DadePaper, Miami, is among them. The distributor has acquired six companies since 1999 (three of them in 2004), and now has 750 employees. Frank Sansone, the company’s COO, identifies “corporate culture” as the biggest factor in identifying a company to acquire. DadePaper, he says, seeks out family-owned businesses that share the former’s values: taking care of customers, recognizing employee needs and emphasizing a “family” work atmosphere.

“If you have similar cultures and similar values, that’s pivotal,” he says. “Once you know the cultures will blend easily, then you need to look at the product lines, and if there’s a strong match between those key criteria, you can overcome all the small issues.”

Larry Holtzman, CEO of Atlanta-based Southeast Link, agrees that corporate cultures must mesh above all else to ensure an acquisition’s success. “Culture is the toughest,” says Holtzman, who has overseen a number of acquisitions over the years. “Product and location — they’re kind of mechanical. You’ll work that stuff out. I’ve seen too many acquisitions where you end up with an ‘us-and-you’ attitude, or a ‘me-and-you’ attitude, and we really work hard to get everyone to say, ‘It’s us now.’”

Companies like Holtzman’s look for employees who share similar work ethics and customer-service philosophies. If an acquired company’s employees are not willing to buy into the acquiring company’s philosophies, it may not be a good fit, says Sansone.

“A careful match of cultures makes it easier to retain the talented people that are important to a successful acquisition,” he says.

Though it may sound obvious, profitable companies are also a must. Holtzman says he looks for companies that are established in the jan/san business with a good account base, and good employees to go with it.

“The keys to making it work are not only the integration, but making sure the right deal is negotiated up front and that it’s financed properly,” Mulick adds.

An acquisition candidate’s ability to broaden geographic reach or expand product lines is also a consideration when acquiring companies. Holtzman’s acquisitions reflect a strategy to expand certain areas of its business, such as equipment service. Most recently, Southeast Link acquired Mr. Sweeper Stores to broaden its retail presence, and capitalize on Mr. Sweeper’s larger repair facility.

You Win Some, You Lose Some
For every merger that ends in success, there’s one or two that fail. Failures generally occur during the integration process. Once an acquisition is made, distributors must quickly and efficiently streamline inventory, operations and employees — without sacrificing customers.

Retaining customers is crucial to making a merger successful. Kimball says it’s up to the newly created company to “sell” itself to customers and suppliers as soon as the merger takes place.

Mergers typically fail, says Mulick, when distributors lose their customer focus because they are concentrating too heavily on ironing out internal issues related to the acquisition.

“In the jan/san distribution business, a key to being successful is focusing on your customer and one of the fallouts of an acquisition is you’ll see a period of time when people are more interested in what’s going on internally,” Mulick says.

Another reason mergers don’t pan out: the acquiring company fails to effectively exploit potential advantages represented by the merger. Kimball recalls a well-known distribution company that acquired another company. Instead of logically analyzing the capabilities of each, the acquiring company moved some inventory to its warehouse — even though the acquired company had a bigger, newer warehouse and could have accommodated everything. Both also had third-party logistics companies running their warehouses, but the acquirer retained their more-expensive provider instead of giving all the business to the acquired company’s provider — a choice that cost the company money.

“[Acquirers] have to look for synergies where they do not have synergies, and they have to look for duplication of effort,” says Kimball.

Kimball recalls another company’s success at pinpointing duplications and optimizing efficiency. The company, a tool distributor, had a number of warehouses. When it eventually brought all inventory under one roof, executives realized the company was carrying five types of hammers.

“By consolidating that to one standard hammer, you can take advantage of bigger volume from a purchasing standpoint, buying it less expensively, and saving money on transportation,” says Kimball. On top of that, by physically consolidating five warehouses, the company saved a whopping $14 million.

Ken Waddell has had his share of successes and failures when it comes to acquisitions. His company, United Solutions Group, was recently acquired by Sikes Paper Co., Atlanta. The merger is going well for Waddell, now a salesman for Sikes Paper; but a year ago, Waddell wasn’t as lucky. He purchased a small safety supply company in 2004, banking on the increased market share he could capture by expanding his offering. Instead, one of the two salespeople he expected to join his company quit, and the revenue wasn’t what he had anticipated. Consequently, the arrangement fizzled, though Waddell retained ownership. When Sikes acquired United Solutions, the safety supply company’s former owner was not asked to join the company.

Similarly, David Sikes, president of Sikes Paper, has experienced one failed acquisition in addition to two successful mergers. In his case, dissimilar corporate culture was the primary reason behind the failed union.

Corporate culture is significantly more important than product mix and geographic reach, he explains. “In terms of synergy, those were easy. But I bought the company in July and we could never merge the cultures. I had to turn around and sell it back.”

Sikes said a few factors led to the deal’s downfall: First, the new company was a logistical stretch at 80 miles away. Second, it was a smaller company that was used to giving a high level of service on $50 or even $25 orders. “We just thought — me and the owner — that we could change that offering and get the customers to place bigger orders less often.”

That didn’t happen, and six months later, Sikes sold it back to the original owner. Financially, it was a wash, Sikes says.

According to Kimball, a lot of companies neglect the business “homework” that has to be done ahead of time.

“These deals go down without a lot of careful planning, which they figure they’ll just get to,” he says. “Lack of proper planning and evaluation is the principle reason mergers that fail, do.

“There are surprises on the books, the worthiness of the inventory, and surprises in personalities and egos. If the courtship were longer and more diligent, there would be fewer surprises,” Kimball says.

Sometimes acquirers mistakenly become too emotionally invested in the acquisition. They need to be objective in their assessment, or a risk a poor match-up.

“Make sure you have an acquisition team that evaluates stuff logically and not emotionally,” Holtzman advises. If you’re looking at a $2-million business, you can’t just assume that it will make a good addition to the company, he explains. “The question is how are you going to do that, and will you do that? You have to be realistic.”

No End In Sight
According to FactSet Mergastat, confidence is high that M&A activity will continue into 2005. One study showed that 23 percent of CFOs queried said they expected to participate in a merger or acquisition in 2005 — up substantially from 14 percent last year.

Holtzman agrees that jan/san M&A activity will continue in 2005 and beyond. “It took a breather for a while, but in ’06 and ’07 you’re going to see more of it again.”